The word “fiduciary” finds its way into commercials, advertisements, articles, and brochures all the time, but what does it really mean? At its most basic, a fiduciary is a person or organization that is charged with acting in the best interest of another person or organization. Financial advisors, legal professionals, business partners, and board members are common examples, as they are expected to put their client or organization’s interest above their own.
One of the most common ways this comes up for nonprofit organizations is in the stewardship of the organization’s resources. Every organization knows that having more available resources equates to having a greater community impact. Usually, a thriving organization will empower a finance committee to act as their fiduciary and invest their excess funds.
However, for an organization that has only recently crossed to the surplus side of the balance sheet, or even for new members to the finance committee, this can be a daunting proposition. But the best tool in either case is a strong Investment Policy Statement (IPS). Here are three tips to get your organization ready to invest:
1. Focus on Purpose
Every nonprofit organization has a mission to keep it on track, and this same idea should extend to an organization’s investments. Are you investing simply to have a safety net, or are you planning to expand services over the next five years? Are you hoping the investments will produce income you can use right away, or are you hoping to grow the assets to fund a big purchase down the road? It’s absolutely critical for organizations to match their investment strategy with their needs.
2. Avoid Fear and Greed
Fear and greed are often called the two biggest enemies of investment returns. In fact, CNN even publishes a Fear and Greed Index to track investor sentiment. Quite simply, this is another way to say, “stay the course.” Often investors will get too greedy when the market is doing well and too fearful when the market is more volatile. Making changes to strategy based on either fear or greed can have devastating consequences for an investment portfolio — and the best way to avoid these impulses is to set a strong IPS and stick to it.
3. Find the Sweet Spot
One common pitfall in drafting an IPS is being too restrictive on how the assets can be invested. The world of investments is ever changing, and an IPS should be flexible enough to take advantage of future opportunities. Depending on the organization’s size and needs, it may be totally appropriate to prohibit the purchase of certain types of securities like closed-end funds or private placements. However, by being too restrictive on how the account must be allocated, a finance committee can be prevented from taking advantage of changing economic conditions.
Finding the right balance with a well-crafted IPS can be difficult. Luckily, a professional financial advisor with in-depth nonprofit experience can shoulder much of the burden and stress for you. To find out more, we invite you to contact McKinley Carter and discover how our team of fiduciary advisors work each and every day to make a difference for our clients and community. Moreover, we are proud to offer a service line completely dedicated to meeting the needs and challenges of the nonprofit community. Learn more.
